Posing the Problem: The Impossibility of Economic
Calculation under Socialismby David Ramsay Steele

The Economic Calculation Argument

For industry to be operated effectively, it is necessary that those
in charge be able to perform “economic calculation.”It does
not matter at all, for the purposes of this argument, whether
“those in charge” are professional managers, acquisitive
capitalists, workers’ councils or other democratically elected
assemblies, or holy men appointed by the gods.The problem of
economic calculation which faces them is examined in more detail
in some of the following essays, but the general idea can be
explained very briefly and simply.

Those in charge of a productive unit, or enterprise (such as a
factory), have to take decisions from time to time about how it
will be run.They have to decide, for example, whether to install
a new kind of machine, or whether to switch from one technical
process to another which will require different raw materials.Often they will have to select one plan out of dozens of possible
alternatives.How are they to choose?

At first, the answer might seem obvious.They should choose
“the best” or “most efficient.”But that is not as simple as it
sounds.It is not a task which can be performed unaided by
those, such as scientists or technicians, who are familiar only with
the physical operatives involved.In fact, the major part of the
problem is beyond the competence of technicians or scientists,
and they are powerless to solve it for us.

As a simple example, suppose that we are in charge of an
enterprise, and have to choose between two technical processes,
A and B.Process A needs 50 tons of rubber, and 40 tons of
timber, per week.Process B requires 40 tons of rubber, and 50
tons of timber, per week.The technical expert has informed us
that A and B are both feasible alternatives for reaching a given
end, but with that her work is done.Her purely technical
knowledge does not enable her to go further, and tell us whether
A or B is preferable.

If there were a third possible process, C, which used 35 tons of
rubber and 35 tons of timber per week, to attain the same result
as A or B, there would of course be no further problem: we
would choose C.But between A and B we stand perplexed.Process A would enable us to save on timber, but at the expense
of rubber.Process B would enable us to save on rubber, but at
the expense of timber.Except for an improbable coincidence,
one of them is the “better” method, the more “efficient,”
“productive” or “economical.” The other is inefficient and
wasteful.But which?

It is clear that we need some way of comparing timber and
rubber, by reducing them to common units.It is equally clear that
any and all physical units, such as weight or volume, would be
irrelevant. (A gallon of water ought not to be equated with a
gallon of mercury, nor a ton of sand with a ton of platinum.)We
are perhaps tempted to say, rather hazily, that we want to be able
to make a comparative valuation of rubber and timber in terms of
their “scarcity,” “costliness” or maybe “social importance.”

In the market, such comparisons are made by referring to prices.The people in charge of the enterprise look at the market prices
of rubber and timber, observing which is cheaper and which
more expensive.If the price of rubber is $500 per ton, and the
price of timber $1,000 per ton, then process A is cheaper than
process B, and is more likely to be profitable.

The timber-and-rubber example is, of course, highly simplified.It
would be more realistic to consider more than two processes,
each of which utilized numerous factors, including various kinds
of labour, with some of the inputs common to all the processes,
though in different quantities, and some peculiar to one process
only, or to a few of them.Then we would have to consider that
the end results of the two (or more) processes might be different
in detail, so that their comparative assessment might lead, say, to
the conclusion that “the product of A is inferior to the product of
B, but A is preferable nonetheless because of it’s considerably
lower cost.” We should remember that the vital role of
economic calculation is by no means confined to major turning
points in the life of the enterprise, such as the choice of a whole
new technology, but extends also to the innumerable adjustments
which have to be made every day, hour or minute.A production
decision does not normally begin with all the “technical” facts,
and only then proceed to the “economic” choice.Rather, the
technician is aware from the outset of market prices, can
therefore think in terms of “costly” and “cheap,” and hardly
ever make purely technical calculations without the ever-present
guidance of the market.Finally, prices change (and priority of
factors of production generally change more frequently,
unpredictably and substantially than prices of finished consumer
goods).Therefore, the enterprise decision-maker does not
merely read off the current prices, but tries to anticipate future
prices, since the decision to adopt a specific course of action may
have to be made well in advance of some of the resulting
purchases of inputs.However, current and recent prices offer a
very convenient starting-point for estimating future prices.All
these qualifications show how much I have simplified the
timber-and-rubber example in order to bring out clearly the
essential point; but it will be evident that they do not diminish the
importance of economic calculation using market prices, but on
the contrary increase it.

I am not, going to claim that reliance on market prices is a perfect
method.At his point, suffice it to observe briskly that (a) market
prices are spontaneous social products resulting from an
unplanned pattern of interactions among millions of people; (b)
market prices generalize, encapsulate or sum up an immense
amount of information which need not be, and generally is not,
known to any single person or committee; (c) we can easily show
that the influences which raise or lower prices, and thereby help
to guide the behaviour of those decision-makers who use these
prices, are influences which would have to be taken into account,
in broadly the same way, in any conceivable system for
coordinating modern industry; (d) calculation using prices works,
that is to say, prodigious industrial achievements have been
brought to pass within societies which relied upon market prices.

As stated, I do not contend that market prices are a perfect
method for performing economic calculation in an advanced
industrial society.I contend that market prices are the only
method There simply is no other way.Therefore, market prices
are essential to the survival of any complex industrial structure
capable of generating high levels of material consumption.

The decisive demonstration of the impossibility of rational
economic calculation under socialism was supplied by Ludwig
von Mises in the spring of 1920, but Mises had his precursors.Hermann Heinrich Gossen, forgotten pioneer of marginal utilityhad written as early as 1854:

only through private property is the measure
found for determining the quantity of each
commodity, which it would be best to produce
under given conditions.Therefore, the
central authority, proposed by the
communists, for the distribution of the
various tasks and their reward, would very
soon find that it had taken on a job the
solution of which far surpasses the abilities of
individual men. (1)

Several nineteenth-century writers came close to a similar
statement.Walter Bagehot pointed out that monetary accounting
was indispensable in order to estimate costs of production, in any
complex industrial society, and he coupled this with observations
on the inability of primitive savages to perform calculations of
profits or costs.He did not go on to draw simple inference that
developed industry without the market was an impossibility.Maybe he considered it too obvious to need stating. (2)

The Related Issues

Other writers directly tackled the question of a Socialist
economic order, but without formulating the calculation problem.Two lines of thought were pursued, which come very close to the
economic calculation argument, but still leave it unformulated.

Wicksteed raised the issue of individuals’ remuneration under
socialism.From Wicksteed’s discussion it seems almost certain
that he had the economic calculation difficulty in mind:

Philip Wicksteed

If public bodies were the only employers, on
what principle should remuneration of the
different agents be fixed?Is it possible to
conceive of any machinery by which the
marginal significance if each should be
determined…? (3)

But he did not explicitly separate the question of allocation from
the question of payment, because he was examining a
hypothetical market socialism in which one enterprise after
another was progressively taken over by the state. (4)

Other economists approached the socialist economy from a
rather different angle.Without committing themselves on the
ultimate feasibility of socialism, they pointed out that if a socialist
society could and did come about, it would have to employ an
allocative system closely parallel to that of the market.Socialism
would have to “price” the factors of production, and would be
compelled to use “rent,” “interest” and “profit,” or at least,
bookkeeping notions strictly analogous to these.Such arguments
were advanced Wieser, Böhm-Bawerk (both 1889), Pareto
(1897) and Barone (1908). (5)

The contributions of Pareto and Barone were to be curiously
misrepresented later.Barone was a followed of Pareto, and they
both expressed their ideas in mathematical equations based on
those of Walras.The point of their arguments was to impress
upon the socialists that any hypothetical socialist economy would
conform to patterns similar to those found in a market.As far as
I know, neither Pareto nor Barone gave a literal, categorical
verdict on whether socialism was a practical possibility, though
the very strong implication of their words is negative.What they
did flatly state was that the function of the price system could
never be replaced by the solving of equations.The equations
only describe the tendency of market prices; they could not be
arrived at independently and used to replace market prices. (6)After Mises had raised the calculation issue, it was claimed that
he had been refuted in advance by Barone, who had proposed
that a socialist society surely could allocate its resources by the
planners’ sitting down and solving equations!Barone’s
blistering rebuttal of socialist misconceptions was hailed as if it
had been a pioneering demonstration of the practicability of
socialism.This bizarre story was given wide currency by Lange
and Schumpeter, and has become part of the present largely
fictitious consensus on the economic calculation debate.

Following Kautsky’s well-publicized speech in Delft, Holland,
on The Social Revolution, the Dutch economist Nicolas G.
Pierson approached the question of the economic viability of
socialism in a paper published that same year, 1902.Pierson’s
main concern is to emphasize that a socialist society would
confront a “problem of value”

The practical problem of value which is
automatically solved [by the market] …
would not disappear if its automatic solution
were made impossible; it would remainin its
entirety. (7)

After showing that a number of separate socialist states would
have to regulate their mutual dealings with the aid of money
prices,Pierson argues that a communist society would be unable
to calculate “net income”, since it would have no unit to
perform the functions now performed by prices.The society
would be unable to determine, say at the end of a year, whether it
or any of its component parts had made a net gain or loss during
that period.To draw up an inventory of all goods at two
different points in time would not suffice: all these items would
have to be expressed in common units of value.

Pierson examines the ways in which a socialist administration
might ration out consumer goods, including the system of labour
vouchers, and shows that trading would re-emerge.He explains
that

The commercial principle, which such a
society sought in vain to abolish, comes once
more into the foreground....The phenomenon
of value can no more be suppressed than the
force of gravity.What is scarce and useful
has value … to annihilate value is beyond the
power of man. (8)

Dealing with Kautsky’s suggestion that socialist “wages” could
be fixed according to labour productivity, Pierson points out that
this is not as easy as it sounds.Disentangling the contributions to
output of all the different workers – determining the productivity
of clerical workers compared with manual workers, for instance,
let alone the contribution made by entrepreneurial awareness of
fruitful possibilities – will be impossible without some assessment
of economic “value”.Pierson somewhat confuses the issue
here by defending the “productivity” of advancing money.Presumably in Kautsky’s socialism, though it retains money and
wages, there would be no money loans to business enterprises.The entire question of which enterprises should be folded, which
continued and which expanded would be determined by
administrative means without the instrumentality of finance.Nevertheless, Pierson’s point, that mere knowledge of
opportunities can be immensely productive, stands.

A1l the essentials of the economic calculation argument are
presented by Pierson.

l.Society faces specifically economic problems, which
cannot be reduced to the fields of competence of
technologists or engineers.

2.Theseproblems will not disappear under
communism/socialism, but the present solution, the market
(for factors of production), will disappear.Communism will
have to find some alternative solution.

3.Any solution must take the form of comparing any and all
goods according to common units denoting what Pierson
calls their “value”

4.(By Implication)Apart from market prices, no such units
can be found.Therefore communism is impossible.

As Mises later acknowledged, “Pierson clearly and completely
recognized the problem in 1902” (9)However, Pierson’s
approach is that of throwing out a number of suggestions about
difficulties in operating a socialist economy.Apparently, he does
not himself realize the relative importance of the points he is
making.He overstresses international trade, in view of the fact
that Marxists believe in world unification. (10)He often fails to
separate the questions of allocation and remuneration, though he
does clearly see that it “is possible … to carry out works at too
high a cost, to put up buildings in the wrong places and to design
them in a manner inappropriate to their purpose” and that this
cannot be a purely technical matter, but must be one of “value”.

Pierson’s continual harping on the necessity of value may seem
strange to a modern reader.But in 1902 any active socialist or
critic of socialism would have known almost by heart the
celebrated passage from Anti Dühring in which Engels explained
how very easy it would be to organize socialist production:

Engels got it wrong

Society can simply calculate how many hours
of labour are contained in a steam-engine, a
bushel of wheat of the last harvest, or a
hundred square yards of cloth of a certain
quality … society will not assign values to
products.It will not express the simple fact
that the hundred square yards of cloth have
required for their production, say, a thousand
hours of labour in the oblique and
meaningless way, stating that they have a
value of a thousand hours of labour.It is true
that even then it will still be necessary for
society to know how much labour each article
of consumption requires for its production.It
will have to arrange its plan of production in
accordance with its means of production,
which includes, in particular, its
labour-power.The useful effects of the
various articles of consumption, compared
with one another and with the quantities of
labour required for their production, will in
the end determine the plan.People will be
able to manage everything very simply,
without the intervention of much-vaunted
“value.” (11)

Today, the myopia and economic illiteracy of this passage are
painfully evident to anyone.

Weber on Rational Calculation

Max Weber

It often turns out that a crucial breakthrough is made
independently and almost simultaneously by several individuals.The economic calculation argument was separately given a full
and clear statement in 1920 by Boris Brutzkus, Ludwig von
Mises and Max Weber.Weber’s version occurs in his
Economy and Society, which was not published until the
following year.

Weber’s treatment is slighter than those of Brutzkus or Mises,
but in its context it is something of an aside, since the work is
mainly an attempt to summarize the classification of “ideal
types” which Weber believed necessary for the sociological
study of modern Western economic and political institutions.This task, however, leads him to point out the limitations of
“calculation in kind” by contrast with monetary calculation, an
issue which was highly topical since in 1919 two influential
socialists, Otto Neurath and Otto Bauer, had each published
books advocating a moneyless economy. (12)Weber refers
specifically to Neurath, who argues that non-monetary calculation
was already well established, that market prices were arbitrary
anyway, since they did not measure anything, and that the
German war economy had shown the way forward to a new
“natural” (moneyless) economy.

Weber’s argument is vitiated by his concern with an unsound
(and not altogether intelligible) opposition between “formal
rationality” and “substantive rationality.” (13)He states that
only the market can permit the achievement of a very high degree
of formal rationality.His concept of substantive rationality is
obscure, but it seems that Weber believes either that formalrationality is important in its own right, or else that it is a
necessary condition of any substantive rationality.At any rate, he
concludes that

the possibility must be considered that the
maintenance of a certain density of
population within a given area is possible
only on the basis of accurate calculation.In
so far as this is true, a limit to the possible
degree of socialism would be set by the
necessity of maintaining a system of effective
prices. (14)

This seems “substantive” enough.Weber acknowledges that
non-monetary budgeting may be “rational” under very simple
conditions, “so long as the situation does not require a veryprecise estimate of the comparative utility to be gained from the
allocation of the available resources to each of a large number of
very heterogeneous modes of use.” (15)Non-monetary
computation in small-scale, self-sufficient households, once it has
to deal with factors of any complexity, is confined to “traditional
standards” and “rough estimates,” and cannot therefore cope
very well with changing conditions.

Rational accounting of any complexity requires money prices, and
these require the autonomy of separate units.Fictitious pries,
which do not correspond to those actually established by
competing enterprises in a market, would be useless. (16)Calculation in kind may work to some extent where different
ways of producing the same final good are being compared, or
where a given supply of factors may be used in alternate ways to
produce one of several kinds of goods.

But the more difficult problems of calculation
begin when it becomes a question of
comparing different kinds of means of
production, their different possible modes of
use, and qualitatively different final products
… the comparison of different kinds of
processes of production with the use of
different kinds of raw materials and different
ways of treating them, is carried out today by
making a calculation of comparative
profitability in terms of money costs.For
accounting in kind, on the other hand, there
are formidable problems involved here which
are incapable of objective solution. (17)

A modern enterprise is perpetually confronted with the question
whether each of its parts is paying its way, or whether any part is
utilizing inputs that could more rationally be used elsewhere.This
can be settled relatively easily and accurately using proceeds and
costs expressed in money, but “it is exceedingly difficult to do
this entirely in terms of material goods, and indeed it can be
accomplished at all only in very simple cases.”No technical
improvements can save the day for moneyless calculation, asserts
Weber: “really exact accounting” in kind is “impossible in
principle.” The main problem is one of imputation, attributing
values to the factors of production.Any non-monetary system of
accounting would have to set up “indices of the value” of
different resources which would have to play a role similar to that
of market prices.But there is no way of establishing such indices:

Nothing is gained by assuming that, if only
the problem of non monetary economy were
seriously enough attacked, a suitable
accounting method would be discovered or
invented.The problem is fundamental to any
kind complete socialisation.We cannot speak
of any kind of a “rational planned economy”
so long as at this decisive point we have no
way of workingout a rational plan” (18)

Brutzkus and Bolshevism

Boris Brutzkus was an economist caught up in the Russian
revolution, the subsequent Bolshevik takeover, and the attempt
by the Bolsheviks to usher in an communist order.In August
l920 the Bolsheviks were at their hour of greatest glory.They
had defeated the “counter revolutionary” forces in the field, and
fastened their own unchallenged rule onto the Russian Empire.The abolition of money was in progress: the communist economy
was visibly taking shape.Its impoverishing dislocations of
production could still be blamed on the recent wars.At this
moment, Brutzkus delivered a lecture to an academic audience in
Petrograd, explaining that “the system of Marxian communism,
as then conceived, was – quite apart from the conditions
produced by the war – intrinsically unsound and must inevitably
break down.”

Seven months later, the Bolsheviks found themselves compelled,
if they wished to remain in power, to abandon the pursuit of
communism and deliberately foster the market economy.At the
same time, there was a temporary relaxation of political
repression.Some criticisms of the regime were permitted to
appear, subject to a rather mild censorship.Britzkas published
the substance of his lecture in a learned journal, and only a few
paragraphs were deleted by the state.In the summer of 1922,
political repression was intensified once more.Many
anti-Bolshevik academics were rounded up and ordered to leave
the country. Trotsky described this policy as “preventative
humanity,” and argued that

Learned ideologists are not at present
dangerous to the Republic, but external or
internal complications might arise which
would oblige us to have these ideologists
shot.Better let them go abroad therefore. (19)

Trotsky probably did not dream that the same preventative
humanity would before long be accorded to him.

In the l92l articles, based on his1920 lecture, Brutzkus points out
that “scientific socialism” has confined itself to criticizing the
capitalist order, without paying any serious attention to the
organization of socialist society.Both the Western social
democrats and the Russian Bolsheviks found themselves in
power without possessing the comprehensive plan which would
obviously be required for the construction of socialism.Nonetheless, the outlines of Marxian socialism are clear: it is on a
huge industrial scale, and it replaces the “anarchy of
production” with a unitary plan.There are therefore no wages,
profits, rent or other prices.

Brutzkus argues that any economic activity “must obey the
principle that its results must respond to the costs expended upon
them.” (20)In a primitive, small-scale society this is fairly easy.In the “capitalist system” the principle is obeyed by making sure
that goods can be sold at a price, which covers their costs of
production.“This evaluation takes place by virtue of a
spontaneous process, the result of which must be taken by the
entrepreneur as data.” But when central planning has supplanted
the market, these data will clearly not be available.

After dismissing the suggestions of Bukharin and Tschayanoff that
calculation in kind could be performed, Brutzkus considers the
idea of using “labour” as a measure of production costs.There
is no way of reducing all the varying qualities of labour to a single
homogeneous measure, and “labour value” would fail to take
account of the current scarcity of capital goods.Furthermore, it
is only in a hypothetical and never-to-be-reached equilibrium that
market prices would equal past production costs (and hence, if
we assume that all production costs can be reduced to labour, to
“labour values”).The actual divergences of market prices from
costs of production represent important influences which ought to
be taken into account, and which would therefore have to be
included in any method proposed to replace market prices.

The socialist planners would have to quantify everyone’s needs,
and then specify the means of attaining them.Brutzkus believes
that even to measure the population’s requirements for
foodstuffs would be extremely difficult, and to estimate all their
needs would be beyond the capabilities of any administrative
body. (21)But this is not the main problem.In the market,
enterprises must pay their way or close down; but under
socialism, “there exists no direct connection between the
productivity of an undertaking and the supply offunds for its
continuance.”Nor could there be any such connection, for

under socialism there is no general measure
of value.Suppose that a Soviet estate has
contributed so and so much milk, so and so
many pounds of meat, so and so many bushels
of grain.How many pounds of best quality
seed, how much artificial manure or oil cake,
how many head of breeding cattle or suits of
clothes and how much fuel may the estate
claim in return for its products?…in a society
without markets the problem is insoluble. (22)

Brutzkus presents a number of other arguments not central to the
economic calculation question.He points out that if the socialist
authorities once accept the need to keep material rewards for
work in proportion to the productiveness of the work, they will
be bound to introduce rent, interest and profit.He argues that
there are no grounds to expect any enhancement of personal
freedom, much less the abolition of the state, from any attempt at
socialist planning, and calls into question the view that people will
work more enthusiastically in a socialist society.Finally, he
claims that conditions in Russia with its self-sufficient isolation and
highly concentrated industry have been rather favourable to the
institution of socialism.Consequently, its failure there is an
especially conclusive refutation.

The Classic Statement

Of the trio which unleashed the economic calculation argument,
Weber, Brutzkus and Mises, the outstanding figure was
undoubtedly Mises. (23)His statement was published first, it
was soon incorporated into a comprehensive critique of socialism
in all its aspects, Die Gemeinwirtschaft (Socialism: An
Economic and Sociological Analysis), it quickly reached a
wide audience of socialists and was so stinging and provocative
that it could not be ignored.Judged from the viewpoint of
exposing the weakness of Socialism as a practical project (which
was not Weber’s primary purpose), Mises’ contribution was
much more pertinent and detailed than Weber’s, and also more
exact and succinct than Brutzkus’.The socialist economist
Oskar Lange, in a sarcastic observation with serious overtones,
stated that Mises’ services to socialist theory were such that a
statue of him ought to occupy an honourable place in the great
hall of the socialist society’s Central Planning Board.True, the
statue has not so far materialized.But then, neither has any
Central Planning board of the kind envisaged by Lange.

In his “Economic Calculation in the Socialist Commonwealth,”
Mises emphasises that the way in which consumer goods are
distributed is a secondary matter.Like Pierson before him, he
points out that once individuals in a socialist society have
collected their “coupons”, trade will emerge.But this trade will
be confined to consumption-goods.Production-goods, because
they will be owned by “the community,” cannot be subject to
commercial transactions.

Oskar Lange

Just because no production-good will ever
become the object of exchange, it will be
impossible to determine its monetary value.Money could never fill in a socialist state the
role it fills in a competitive society in
determining the value of production-goods.Calculation in terms of money will here be
impossible.(24)

Under simple conditions, a Robinson Crusoe, or a familyof
subsistence farmers, would not only value consumption-goods,
but would also be able to impute value to production goods.If
fish were valued, so would be a fishing net.If wild boar were
valued, so would be spear.Even at such a simple level, the
producers would have to take account of “the
intersubstitutability of goods.” Some production-goods could be
used for producing alternative consumption-goods in different
quantities.Crusoe would have to make a rough-and-ready
estimate of the importance of these production goods, but he
would not, of course, be able to total costs of production in
money prices.Neither would he have access to any units which
could enable him to assess whether a contemplated course of
action (such as building a highly elaborate boar trap with
materials which could be used for other purposes) was worth it.

In a society with a more complex technology, the
rough-and-ready estimates employed by tiny bands of hunters
and: farmers would be useless.Here, assessment is made in
terms of costly or less costly, dear or cheap, as demonstrated by
objective exchange-values: market prices expressed in money.The use of objective exchange-values for economic calculation
“entails a threefold advantage.”Calculation can be based upon
the valuations of all participants in trade; there is in monetary
profitability an immediate and sure indication of economical
production; and values can be referred to a common unit.

Two conditions are necessary before monetary calculation can be
employed in directing production.First, higher order goods
(capital goods) must be exchanged, as well as first order goods
(consumption goods.).It is not enough to be able to value
first-order goods, because

No single man can ever master all the
possibilities of production, innumerable as
they are, as to be in a position to make
straightway evident judgements of value
without the aid of some system of
computation.The distribution among a
number of individuals of administrative
control over economic goods in a community
of men who take part in the labour of
producing them, and who are economically
interested in them, entails a kind of
intellectual division of labour, which would
not be possible without some system of
calculating production and without economy. (25)

Second, there must be “a universally employed medium of
exchange,” money, used in the exchange of means of production
as well as consumption-goods.Otherwise it would be impossible
to reduce all the many exchange-relationships to a common
denominator.

It is no use appealing to existing examples of state-directed
concerns, for these are islands of “socialism” within the market,
having access to market data.Nor can socialism merely continue
what was done previously within the market, for with changing
conditions the old methods of production will “become
irrational.”

Because the socialist planners will be unable to reduce all the
means of production to a common denominator, they will be
confined to hazarding “value estimates.”The possibility of
exact calculation disappears with the price system.“Where
there is no free market, there is no pricing mechanism, there is no
economic calculation.” (26)

As a possible way out, Mises considers the division of industry
into branches controlled by “syndicates” permitted to trade
with each other.However, no useful prices could emerge except
where the syndicates’ autonomy was such that they held de
facto property rights in their means of production:

This would not be socialisation but workers’
capitalism and syndicalism.(27)

Today we might call this “market socialism,” a term that would
have sounded very strange in 1920.Mises makes it clear that he
regards “workers’ capitalist and syndicalism” in this context,
as a form of “private ownership of the means of production.”It
is effective control by sections of society, instead of unitary
control of all resources from a single centre.

Mises dismisses on two grounds the suggestion that labour-hours
could be used to estimate production costs.It ignores the
different qualities of labour, and it does not take into account
unproduced natural resources..The latter point applies even if,
along the lines of the Marxian theory of value, we subsume under
“socially necessary labour-time” all natural resources as and
how they are used up in production:

Let the amount of socially necessary
labour-time required for the production of
each of the commodities P and Q be 10
hours.Further, in addition to labour the
production of both P and Q requires the raw
material a, a unit of which is produced by an
hour’s socially necessary labour; 2 units of a
and 8 hours’ labour are used in the
production of P, and one unit of a and 9
hours’ labour in the production of Q.In
terms of labour P and Q are equivalent, but
in value terms P is more valuable than Q.The former is false, and only the latter
corresponds to the nature and purpose of
calculation. (28)

Mises also advances the argument that people cannot be
expected to display suitable initiative in an organisation in which
they have no personal stake, but he observes that even if this
objection were of no account, the economic calculation argument
would be decisive.After a brief review of the inconclusive
remarks of Otto Bauer and Lenin on the running of a socialist
economy, Mises finishes by declaring that although “rational
economic activity is impossible in a socialist commonwealth,”
this need not deter those socialists motivated by ascetic ideals,
nor those prepared to abandon material affluence for the sake of
the ethical goal.Mises does not dispute that “socialism” is
possible at a low level of technology and consumption.

Ludwig von Mises

What Mises Meant by “Socialism”

Misses always made clear what he meant by socialism, a society
without private ownership and market exchange of the means of
production.Socialism might or might not do away with money
altogether, but it would by definition do away with monetary
exchange of factors of production.In socialism, social
production would be planned and managed as a single unit by a
single supreme planning body.

There is no question but that this conception of socialism
corresponded to that of the vast majority of avowed socialists in
1920, and for some time afterwards.One indication of this is
that Brutzkus and Weber independently took it for granted, and
the earliest respondents to Mises did not challenge it.However,
Mises did exaggerate slightly in claiming that “all socialists before
1920” held that “socialism necessarily requires the abolition of
the market and of market exchange and even that this fact is both
the essential element and the pre-eminent feature of a socialist
economy.” (29) To make this statement correct, it is necessary
to put “Marxist socialists” instead of “socialists”, and
“market for industrial means of production” instead of merely
“market”.As a matter of fact, the earliest socialists, the
followers of Saint-Simon, did not commit themselves to the total
elimination of the market, and Proudhon was an early “market
socialist.” The Communist Manifesto execrated “bourgeois
socialism”, which sought to reform instead of abolish “the
bourgeois relations of production” (private property and the
market).It was the growth of Marxism at the expense of other
socialist schools which led by the turn of the century to the
predominance of the strictly non-market idea of socialism and
which was almost taken for granted in the German-speaking
world when Mises penned his critique.

It may clarify matters to distinguish four varieties of projected
socialism.

1.Marxian communism.Total abolition of the market,
money and prices.Distribution of consumer-goods either
by ration tickets, such as labour-vouchers (definitely not
money) or by free access.Coordination of production to
be achieved by central planning, using technical data only,
not prices.

2.What we might loosely call “Communist production,
market distribution.”A market exists for consumer
goods only.Either it emerges spontaneously on the basis
of the ration tickets mentioned above; or the planning
authority deliberately allows for such a market, pays
everyone in tickets which can be transferred and
accumulated, and somehow prices consumer goods so
that they can be acquired from “the community” (i.e.
the planning body) in exchange for the tickets.All
production goods are owned by “society”; therefore
they do not change hands on a market, and have no
market prices.

3.Proposed systems which, while not explicitly either of
the above, contain features which must lead to one of the
above.(For example, if it were proposed that all prices
should be fixed centrally by the state, this would man that
the state would have to determine all physical quantities
and technical processes, too.The “prices” would
cease to be real prices at all, and the market for factors
of production would be ruled out.)

4.Out-and-out “market socialism,” in which there is a
market for both consumer goods and means of
production.

According to Mises, the first three are practically impossible, in
conjunction with large-scale industry and division of labour.The
fourth is entirely feasible, though it amounts to acceptance of
everything which most socialists for the past hundred years have
been denouncing as capitalism.It is possible that market
socialists may reject some of the institutional requirements and
social consequences of a market for factors of production, in
which case their position is internally inconsistent.For example, a
society with a market for factors of production is one where
industry is governed by “the profit motive,” and where neither
incomes no wealth holdings can be equalised.

Mises defined socialism in terms of ownership by “the
community.”In passing he indicated that this could mean
nothing other than state ownership, but he did not wish to be
sidetracked by a merely semantic argument. (30)Although the
rhetoric of modern socialism has generally been democratic,
appealing to the interests of the masses, the economic calculation
argument applies to any centrally-directed system:

A socialist community can have only one
ultimate organ of control. … It does not
matter whether this organ is an absolute
prince or an assembly of all citizens organised
as a direct or indirect democracy.It does not
matter how this organ conceives its will and
expresses it.For our purpose we must
consider this as accomplished. (31)

As Rothbard has pointed out, (32) the argument applies equally
to the notion of “One Big Firm,” a single cartel or trust
emerging from the market.Such a firm would be unable to
calculate and would swiftly disintegrate.In practice, this means
that the free market places a limit on the extent of even partial
monopolies.The growth of such monopolies must lead to the
indeterminacy of prices, with consequent losses and the
re-assertion of competition.

(3) P. H. Wicksteed, The Common Sense of Political
Economy, (London: George Routledge and Sons, 1933), 2:682.

(4) Actually there can be no possibility of separating allocation
from remuneration, but this is a conclusion drawn from the
economic calculation argument, and to state the argument clearly
it is necessary, as a preliminary, to separate the two issues.

(12) Otto Neurath, Durch die Kriegswirtschaft zur
Naturalwirtschaft [Through the War Economy to the Natural
Economy]; Otto Bauer, Der Weg sum Sozialismus [The Road
to Socialism].Neurath’s work is now available in English as
“Through War Economy to Economy in Kind,” in a collection
of his writings: Marie Neurath and Robert S. Cohen, eds.,
Empiricism and Sociology [Dordrecht, Holland: D. Reidel,
1973).His argument is briefly dealt with in T. J. B. Hoff,
Economic Calculation in the Socialist Society (London:
William Hodge, 1949), pp. 48-51.

(28) Ibid., p. 113.If we follow Marx’s usage, there would be
no “value” under socialism/communism and hence no
application of the labour theory of value,.There is no evidence
that Marx intended his labour theory of value to have any bearing
on the organisation of socialist production; it is a theory to
account for relative prices under capitalism.Mises writes of
“the labour theory of value” as a basis for socialist calculation,
but if we read this as “accounting in socially necessary
labour-hours,” the argument is not affected.

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As a simple example,
suppose that we are in
charge of an enterprise,
and have to choose
between two technical
processes, A and B.
Process A needs 50 tons
of rubber, and 40 tons
of timber, per week.
Process B requires 40
tons of rubber, and 50
tons of timber, per week.
The technical expert
has informed us that A
and B are both feasible
alternatives for
reaching a given end,
but with that her work
is done. Her purely
technical knowledge
does not enable her to
go further, and tell us
whether A or B is
preferable. If there were
a third possible process,
C, which used 35 tons of
rubber and 35 tons of
timber per week, to
attain the same result as
A or B, there would of
course be no further
problem: we would
choose C. But between
A and B we stand
perplexed. Process A
would enable us to save
on timber, but at the
expense of rubber.
Process B would enable
us to save on rubber,
but at the expense of
timber. Except for an
improbable
coincidence, one of
them is the “better”
method, the more
“efficient,”
“productive” or
“economical.” The
other is inefficient and
wasteful. But which?

The contributions of
Pareto and Barone
were to be curiously
misrepresented later.
Barone was a followed
of Pareto, and they both
expressed their ideas in
mathematical equations
based on those of
Walras. The point of
their arguments was to
impress upon the
socialists that any
hypothetical socialist
economy would conform
to patterns similar to
those found in a market.
As far as I know, neither
Pareto nor Barone gave
a literal, categorical
verdict on whether
socialism was a
practical possibility,
though the very strong
implication of their
words is negative. What
they did flatly state was
that the function of the
price system could
never be replaced by
the solving of
equations. The
equations only describe
the tendency of market
prices; they could not
be arrived at
independently and used
to replace market
prices. (6) After Mises
had raised the
calculation issue, it was
claimed that he had
been refuted in advance
by Barone, who had
proposed that a
socialist society surely
could allocate its
resources by the
planners’ sitting down
and solving

Under simple
conditions, a Robinson
Crusoe, or a family of
subsistence farmers,
would not only value
consumption-goods, but
would also be able to
impute value to
production goods. If fish
were valued, so would
be a fishing net. If wild
boar were valued, so
would be spear. Even at
such a simple level, the
producers would have
to take account of “the
intersubstitutability of
goods.” Some
production-goods could
be used for producing
alternative
consumption-goods in
different quantities.
Crusoe would have to
make a
rough-and-ready
estimate of the
importance of these
production goods, but
he would not, of course,
be able to total costs of
production in money
prices. Neither would
he have access to any
units which could
enable him to assess
whether a contemplated
course of action (such
as building a highly
elaborate boar trap
with materials which
could be used for other
purposes) was worth it.

Mises defined socialism
in terms of ownership by
“the community.” In
passing he indicated
that this could mean
nothing other than state
ownership, but he did
not wish to be
sidetracked by a merely
semantic argument.
(30) Although the
rhetoric of modern
socialism has generally
been democratic,
appealing to the
interests of the masses,
the economic
calculation argument
applies to any
centrally-directed
system:
A socialist community
can have only one
ultimate organ of
control. … It does not
matter whether this
organ is an absolute
prince or an assembly of
all citizens organised as
a direct or indirect
democracy. It does not
matter how this organ
conceives its will and
expresses it. For our
purpose we must
consider this as
accomplished. (31)